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Final Regulations for the Advanced Manufacturing Production Credit

The IRS recently issued final regulations for the Section 45X Advanced Manufacturing Production Credit, clarifying and expanding key provisions from the proposed regulations released in late 2023. These updates are essential for manufacturers aiming to maximize this valuable tax incentive.

Overview of the Section 45X Credit

The Section 45X credit, established by the Inflation Reduction Act (IRA), incentivizes the domestic production and sale of clean energy components. It applies to eligible components produced and sold in the United States between December 31, 2022, and December 31, 2032.

The total credit amount for a tax year equals the sum of the credit amounts for each eligible component, assuming the component’s production and sale is part of a manufacturer’s business. The IRA defines “eligible component” as any solar or wind energy component, eligible inverter, qualifying battery component (electrode active materials [EAMs]), battery cells and battery modules or applicable critical minerals (ACMs).

Key Updates in the Final Regulations

Spanning nearly 50 pages, the final regulations are extensive. Here are some of the most notable issues manufacturers should be aware of:

“Produced by the taxpayer.” The final regulations essentially adopt the proposed regulations’ definition of “produced by the taxpayer.” The final regulations define it as “substantial transformation” of constituent elements, materials or subcomponents into a complete and distinct eligible component that’s functionally different from what would result from “minor assembly or superficial modification.”

However, they also expand the definition to recognize two types of production: primary (using non-recycled materials) and secondary (using recycled materials). Both production types can qualify for the credit. The final regulations also confirm that a manufacturer that assembles constituent components to produce solar modules or battery modules using battery cells can claim the credit.

Eligible costs of production. The final regulations reverse the proposed rules by allowing producers of EAMs and ACMs to include direct and indirect material costs in their production costs if certain conditions are met. This applies as long as the material isn’t an eligible component when the manufacturer acquires it.

They also permit the inclusion of extraction costs for raw materials in the United States or a U.S. territory for EAMs and ACMs. The costs must be paid or incurred by the credit claimant.

Contract manufacturers. Manufacturers using contract producers to create eligible components can specify in the manufacturing agreement which party — you or the contractor — can claim the credit. The IRS won’t challenge the contract as long as the parties submit signed certification statements.

Interplay with the Section 48C credit. Some costs might qualify for both Sec. 45X and the Section 48C qualifying advanced energy project credit. The final regulations explain that property that otherwise qualifies as an eligible component under Section 45X is eligible only if no part of its Section 45X facility is included in the qualified investment of a Section 48C facility.

This means you can have multiple independent manufacturing facilities where some components from facilities will qualify for the credit and other components won’t because the latter facilities fall within a qualified investment of a Section 48C facility. The regulations clarify that the physical proximity of facilities is irrelevant if they’re independent.

Substantiation of materials costs. The final regulations introduce substantiation requirements for direct or indirect materials included as production costs for EAMs and ACMs. Along with your tax return, you must, among other things, provide certifications from suppliers from which you purchased constituent elements, materials or subcomponents, attesting that the supplier isn’t claiming the credit or aware of any earlier supplier claiming it.

Planning Considerations

While the Section 45X final regulations provide clarity on these and numerous other issues, compliance remains complex. For example, you’ll need to ensure that your sales and vendor agreements include the necessary language to qualify for the credit and that you collect the requisite documentation.

To further complicate matters, President Trump has criticized the IRA, casting uncertainty over the future of Section 45X credit. For now, manufacturers should act promptly to take advantage of the credit. Our team is here to guide your business through these complexities and ensure you maximize the benefits of this important tax incentive.

Mickel Pompeii, CPA, is a tax partner at Dannible & McKee, LLP, a Syracuse-based public accounting firm that has been delivering expert tax, audit, accounting, valuation and consulting services since 1978. For more information on this topic, contact Mickel at mpompeii@dmcpas.com or (315) 472-9127.

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